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Energy efficient manufacturing

For manufacturers who own or rent out their business premises, new regulations may mean significant fines – are you at risk?

The Minimum Energy Efficiency Standard (“MEES”) was introduced by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (“Regulations”), requiring all rented commercial properties to have a minimum Energy Performance Certificate (“EPC”) rating of E. This means that, as of 1 April 2018, landlords are prohibited from granting, renewing or extending a lease for a property with an EPC-rating of F or G. From 1 April 2023, landlords will not be able to allow leases of any properties with an EPC-rating of F or G to continue.

Landlords who breach the Regulations will face a fine of either £10,000 or 20% of the rateable value of the property, whichever is higher, up to a maximum of £150,000.

Relying on previous EPC ratings

Businesses and property owners should be mindful of placing reliance upon the existing EPC ratings of a property as a guide to what rating the same property would achieve if assessed today. Successive revisions of building regulations have significantly increased the energy efficiency requirements. That trend is likely to continue in line with the Government’s ‘Clean Growth Strategy’.

Research carried out by Arbnco in its Re-Simulation Analyses of February 2017 simulated the reassessment of 3,500 non-domestic properties with EPCs produced within the last five years. The research found that:

Nearly a quarter of all properties produced lower EPC- ratings when reassessed

33% of all D and E rated properties dropped to F or G ratings.

The first EPCs are rapidly approaching the end of their 10-year validity and, according to the Energy Act 2011, the Secretary of State for Energy and Climate Change must ensure that all leased properties are brought up to at least an EPC rating of D by 2025 and C by 2030. Considering this legislative ambition, it would not be a surprise to see a growing trend of higher standards and more rigorous EPC assessments.

Practical implications for manufacturers

There are certain exceptions and exemptions that property owners may seek to rely on to avoid the immediate bite of the Regulations. For example, industrial sites with a low energy demand are excluded from the Regulations. Previous guidance suggests that the exception relates to very low energy sites, such as greenhouses with a heating system switched on only for a few days to encourage germination. The vast majority of manufacturing premises will therefore be unlikely to qualify. Even if the exception can be used now, it is likely to become increasingly obsolete as the manufacturing sector increases the use of digital technology as a result of Industry 4.0, meaning higher energy demand as a side- effect of increased efficiencies.

A landlord may be entitled to rely on an exemption, allowing a property to be legally let with an EPC rating below E, if one of the following circumstances applies:

Devaluation: an independent surveyor concludes that the energy efficiency improvements are likely to reduce the market value of the property by more than 5%

Third Party Consent: where necessary, consent from a third party has been refused or given with conditions which the landlord cannot reasonably fulfil

The “Golden Rule”: an independent surveyor determines that all improvements have been made or that improvements that could be made would not pay for themselves through energy savings within seven years

Temporary Exemption: if a landlord has become the landlord recently by any acquisition, the undertaking of works can be delayed for six months.

For any exemptions to be valid, they must be registered on the central government PRS Exemptions Register. They only last five years and cannot be transferred to a new landlord.

Landlords and tenants in the manufacturing sector

It is not unusual for manufacturers to share their commercial premises with another party (or group company) to mitigate overheads, diversify income streams or rationalise the production process.

The Regulations will not be triggered by granting a mere licence to occupy as there will be no renting out of the property. However, if there has been an accidental creation of a tenancy by granting ‘exclusive possession’, this will be caught by the Regulations. The property owners will therefore need to give some careful thought as to how best to organise their businesses to ensure that the Regulations are not accidentally engaged.

For manufacturer tenants with full repairing leases of whole, landlords will not be able to recover MEES- related costs, unless the lease contains a specific clause to this effect. However, manufacturers with a lease of part and a service charge may find themselves paying (through the service charge) certain MEES costs. This will depend very much on the wording of the lease.

With any new leases, negotiations around specific MEES-related clauses, or clauses talking about energy efficiency improvements in more general terms, may now become more common.

Rent reviews are another potential area which may be impacted by MEES. Arguments about whether it is lawful to grant the ‘hypothetical lease’ used for such reviews may be made by tenants. Landlords may in turn seek to rely upon any stated assumptions that the property may be lawfully let. However, that may be met by counter-arguments that such assumptions are themselves onerous for review purposes given potential costs of any necessary improvements, and hence cause rents to be lower.

With the impact of a suspected MEES failure being potentially very profound and far-reaching, manufacturing sector landlords and tenants would be well- advised to grasp the EPC nettle sooner rather than later.

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